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Volt Resources Limited's Bunyu Graphite Project prepares for first production in 2018

Hayes noted that Bunyu North product samples have returned excellent first-stage processing results.
Graphite concentrate
Concentrate produced in test work on graphite from the Bunyu project

Volt Resources Ltd (ASX:VRC) has strung together two impressive years, with 2016 marked by outstanding success on the exploration front and 2017 being the building blocks for 2018.

The company is focused on the exploration and development of its Bunyu Graphite Project in Tanzania, and the company secured a number of offtake partners in 2017.

Though this news seemed to be missed, it was the release of exploration results, increases in mineral resources and completion of studies in 2016 that provided substantial share price momentum.

In the 12 months leading up to the company hitting a high of 15 cents, its shares increased ten-fold.

Not surprising in a way, given that the company confirmed that it had one of the largest graphite resources in Africa during that period.

Prefeasibility study returns compelling fundamentals

Volt also finished 2016 on a strong note, delivering a prefeasibility study (PFS) of the Namangale Project (renamed Bunyu) featuring a pre-tax net present value of US$1.31 billion.

The study was based on a mineral resource estimate of 461 million tonnes at 4.9% total graphitic carbon (TGC).

With a 22-year resource, 87% internal rate of return and a 1.4-year payback period, Volt is well-positioned to deliver an impressive definitive feasibility study in the coming months.

Definitive feasibility study due mid-2018

From a broader perspective, the PFS proved that the Bunyu project’s business case was commercially and technically viable.

This paved the way for progression to a definitive feasibility study (DFS), which should be completed by mid-2018.

The metrics contained in the study should increase the confidence level of resources and reserves to support DFS level planning, a near-term potential share price catalyst.

READ: Volt Resources' offtake partner validates quality of Bunyu graphite products

The company made excellent progress in developing relationships with end users in 2017, signing agreements with strategic partners for a minimum of 36,000 tonnes per annum.

These included high-profile players such as China National Building Materials General Machinery, NanoGraphene and Aoyu Graphite, effectively endorsing the graphite quality.

Volt’s aim is to be one of the top three global suppliers of natural graphite by 2020, and given the size of its resource, this appears to be within its reach.

Benefits of existing infrastructure

Also working in its favour is the project’s close proximity to road and port infrastructure.

The Bunyu Graphite Project is in southeast Tanzania.

While this has its obvious operational benefits, there is a material impact on the capital development costs and logistics costs during the construction and operation phases.

From a financial perspective, these factors also can potentially drive down overheads, enabling better margins and/or the opportunity to be more competitive in the marketplace.

With regard to transport, there is sufficient capacity at the Mtwara Port to support the project’s export requirements.

Regulatory changes panic investors

With all bases seemingly covered, one couldn’t be blamed for pondering why the company’s share price fell so sharply in 2017.

For the best part, its shares were sold down during that period as a result of uncertain conditions emerging for the mining industry in Tanzania as regulatory changes were flagged.

On this front, it is important to note the nature of the Tanzania government’s concerns and the industry sectors that could potentially be affected.

In July 2017, the Tanzanian parliament passed three bills containing changes to the legal framework governing the natural resources sector.

Management’s view is that the changes will not prevent Volt from developing Bunyu.

However, the changing environment discouraged the raising of funds in the short term and delayed the initial progress of the stage I feasibility study.

Is the graphite industry really under threat

With issues regarding mining licenses, environmental and social impact studies having been addressed in collaboration with both government and community, Volt is back on the front foot.

READ: Volt Resources ticks off another milestone for graphite project in Tanzania

While the Tanzanian government is still taking a strict stance on projects being developed in the country, there is a point of view that it isn’t graphite miners that are under attack.

It was only a week ago that Tom Hayes, a UK based analyst for Edison Investment Research, said: “The risks appear to be restricted to the gold and diamond sectors, and we see little transfer of risk to the industrial minerals sector, of which graphite is a constituent.”

Two-stage production strategy

The company plans to develop Bunyu in two stages.

Stage I will be focused on the production of 20,000 tonnes per annum of graphite concentrates using a low strip ratio.

This will reduce costs and lower upfront capital investment to about US$29 million while generating first cash flows by the fourth quarter of 2018.

The scale of operation could be maintained for more than seven years with the company able to expand to a multi-decade life of mine through a stage II development.

Increased production in stage II to meet uptick in demand

Stage II development is an expansion of production based on an anticipated increase in market demand by 2020.

Management expects the new plan, which will have the capacity to produce 170,000 tonnes per annum, to be completed and in production by 2020.

Crunching the numbers

Annual operating expenditure at full tilt is estimated at US$93 million which equates to a life of mine average of US$536 per tonne.

Based on these metrics the project is expected to deliver annualised earnings before interest, tax, depreciation and amortisation (EBITDA) of US$195 million.

However, taking a step back, Hayes from Edison has run the numbers on stage I, attributing a valuation of 7.9 cents per share, increasing to 9.6 cents in 2020.

The reason behind the increase is that there will be a period when production and sales move through a ramp-up stage before reaching steady-state status by 2020.

Should Volt trade in line with the mid-point of Hayes’ valuation it would imply upside of about 100% based on the company’s recent trading range.

Perhaps this justifies the near doubling of the company’s shares to a 12-month high of 4.8 cents since the start of 2018.

Edison attracted by high-quality product

Hayes believes that the production of a graphite concentrate via flotation to a 95% TGC purity level should be relatively simple for the majority of junior graphite developers.

By contrast, he is of the view that the production of higher-purity graphite beyond 95% has exponentially higher energy requirements for every extra percent in purity gained.

He highlighted that the other major factors in determining the quality of graphite concentrates were the inclusion of impurities and the crystalline structure of graphite.

This impacts its effectiveness in holding and discharging electrical charge.

If the graphite is to be used for fire-retardant applications, another critical factor is how well the graphite expands.

Offtake partner gives product tick of approval

Hayes noted that Bunyu North product samples have returned excellent first-stage processing results including carbon purity of 99.6% and oxygen content of 0.08%.

This test was performed by Volt’s US-based offtake partner, NanoGraphene, a producer of graphene products utilising environmentally friendly technology.

Volt has engaged Exotix Capital to undertake a Tanzanian Bond issue to raise the required funding for the development of stage I.

READ: Volt Resources receives solid investor feedback in advance of bond issue

Volt is to proceed with a formal bond prospectus process and listing of the bonds on the Dar es Salaam Stock Exchange in Tanzania.

The decision followed positive investor meetings with investor groups, including Tanzanian and Ugandan Pension Funds, during November and early December 2017.

While their support is important from a financial perspective, this could also be viewed as a vote of confidence by major local funds with a low appetite for risk who know the landscape.

US$40 million funding

Volt and Exotix have sized the debt transaction at US$40 million which will allow net project development and working capital funding of about US$31 million.

This takes into account funding for a Debt Service Reserve Account (DRSA) and costs of issue.

The bond raising is expected to be completed by June.

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